ECOS2201 - Economics of Competition and Strategy Workshop - 5 1. If an individual is risk averse and faces a gamble a. the certainty equivalent of the gamble is less than the expected value of the gamble b. the individual’s utility function is concave c. the individual would prefer the expected value of the gamble for sure rather than the gamble d. all of the above 2. An individual has the following utility function, U ( y ) = √ y . Consider the gamble, .8 probability of a payoﬀ of 25, and .2 probability of a payoﬀ of 100. i. Is this individual risk averse?

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Unformatted text preview: ii. Calculate the expected value of the gamble. iii. Calculate the expected utility of the gamble. iv. Calculate the certainty equivalent of the gamble. v. Calculate the risk premium. vi. Draw on a diagram. Be accurate. 3. A tradeo between incentives and insurance is at the heart of the agency problem. Discuss 4. True, False, Uncertain, Explain. If agents actions (eort) could be observed, then there is no agency problem. 5. If a critical task is dicult to measure, then all incentives should be weak. Discuss 1...
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